January 08, 2008

Can Public Entities Hire Lawyers on a Contingent Fee Basis?

Local governments try to abate lead paint -- using contingent fee lawyers.

Kimberley A. Kralowec noted last month in The UCL Practitioner that a California Court of Appeal panel will soon hear argument on a hot issue among opponents of contingent fees: Does the prospect of earning a contingent fee rob the lawyer who represents a public entity of "neutrality"?

The trial judge answered yes, at least in cases involving abatement of public nuisances. He relied on a 22 year-old California Supreme Court decision, People ex rel. Clancy v. Superior Court, 705 P.2d 347 (Cal. 1985), which dealt with efforts to shut a book store on the ground that it sold obscene material, a misdemeanor.

The case, County of Santa Clara v. Superior Court, No. H031540 (Cal. Ct. App.), goes before Their Honors on January 17, 2008, in San Jose. The plaintiffs, several cities and counties in California, seek to require pigment makers to pay for removing lead paint from homes and buildings. You can read the principal briefs -- courtesy of Ms. Kralowec -- here.

Threat to Neutrality? The trial judge focused on Clancy's "neutrality" requirement, dismissing the notion that any governmental entity could exercise enough control over a contingent fee lawyer (CFL) to assure lawyer's necessary neutralness. That the lawyer in Clancy served as the city's sole counsel and could on his own say-so bring criminal charges did not appear to matter. His Honor even concluded that the danger of the CFL's committing un-neutral acts required invalidation of "any" contingent fee arrangement -- regardless of the client's contractual right to make litigation decisions (including ones regarding claims, settlement, and trial strategy), no matter how tight the language retaining those rights, and regardless the intensity of the oversight of the CFL.

Tort Reform Angle. We may assume that the defendants who moved to axe the contingent fee arrangement did so with a particular kind of neutrality in mind -- the type that kills the lawsuit because the government hasn't the resources to pay lawyers on an hourly basis.

That would help explain the defense-supporting involvement of amici like the American Tort Reform Association, the U.S. Chamber of Commerce, and the American Chemistry Council.

What Would Hourly Lawyers Do? The decision raises interesting questions about the ability of cities, counties, and other units of government to enhance enforcement of civil law by hiring CFLs at no out-of-pocket cost to taxpayers.

First, does hiring a CFL to seek purely civil remedies raise the same "neutrality" concerns as appointing a private prosecutor to press criminal charges?

Second, would outside lawyers working by the hour feel any differently about enforcement than a CFL would? Or would they simply prefer that the lawsuit last as long as possible, regardless of the outcome, maximizing their fee at no risk to them?

Third, does paying by the hour in itself give the client effective control of the litigation? Or is active supervision still necessary?

Finally, do contingent fee agreements really tie clients' hands the way critics imagine they do? In Blawgletter's experience, a client will have only itself to blame if it doesn't insist on retaining key rights -- including the authority to fire the CFL, with or without cause; to accept or reject all settlement proposals, including handsome ones; and even to drop a case, regardless of its strength and prospects.

The economic consequences of pursuing civil remedies with the "neutral" stance of a government representative are essentially the same in either an hourly case or a contingent fee lawsuit. The client's decision to fire, reject, or quit has the effect of wasting the hours that have been invested in the litigation. In an hourly case, the lawyer simply keeps the hourly fees. The CFL situation differs only in that the client will have to reimburse the CFL's expenses and, in some situations, pay the CFL's lodestar (hours times hourly rate) or the contingent fee that the CFL would have earned.

Our Take. Blawgletter finds the idea that all contingent fee arrangements destroy a governmental client's neutrality contrary to experience and implausible even in the realm of theory. Last November, so did the court in City of Grass Valley v. Newmont Mining Corp., 2007 WL 4166238, at *1 (E.D. Cal. Nov. 20, 2007), which distinguished Clancy because "the City Attorney for the City of Grass Valley is acting as co-counsel in this action and the City retains 'ultimate decision-making authority in the case.'"

We also doubt that forcing local governments to pay lawyers by the hour provides a "neutral" solution that, per Clancy, balances the interests of the people against those of the defendants. An hourly arrangement doesn't make the lawyers any more "neutral" than a contingent fee does. Both the hourly lawyer and the CFL have an incentive to maximize their income. And the financial consequences to the client of exercising control under either arrangement are basically the same.

The hourly fee has problems of its own. It encourages inefficiency. And the necessity of the government's coming out of pocket weakens enforcement when it does not prevent it.